Paradoxical transition to the blockchain economy in the Central African Republic

On the evening of April 22, 2022, the media was unanimously surprised by the shift in monetary policy in the Central African Republic: the adoption of bitcoin as an official currency alongside the CFA franc and the legalization of the use of cryptocurrencies.

The Presidency of the Central African Republic affirms that “this step puts the Central African Republic on the map of the most courageous and visionary countries in the world”, considering that it will be the second country in the world to take this step after El Salvador, the first in all of the African continent.

Optimism about the new blockchain economics is not shared by many observers, such as Bill Gates, who believes that cryptocurrencies do not bring anything to society. This position is also held by Christine Lagarde, director of the European Central Bank, for whom these digital assets are worth nothing.

Cryptocurrency in the Central African Republic, the Far West that incites mistrust

There seem to be two reasons for the concerns raised by the Bangui decision.

The first is simply the fact that cryptocurrency is driven by a self-made claim that escapes the traditions and classics of economies and exchange systems, whose laws are in force and identifiable at all times. A veritable black hole for adherents of the social contract, who believe that unauthorized patterns of organization are outlaws in the Wild West.

The second reason is the economic size of the Central African Republic, which is one of the poorest countries on the planet. Let’s take a closer look.

Central African Republic: Bitcoin becomes the official currency (France 24, April 28, 2022).

The lawsuit against crypto assets is not without reason. The adoption of cryptocurrency as legal tender is to engage in the geopolitics of unknown, uncertainty and surprise – uncertainty is a source of insecurity, if only because it facilitates the development of unknown intent and the dissemination of unsupervised actions. Converting activities that depend on sovereignty to dependence on market laws or areas of extreme liberalism, created precisely to escape state sovereignty and other political constraints, is not without risk. In this race, weak states such as the Central African Republic do not seem to have the best assets.

And what about volatility, the intrinsic feature of cryptocurrencies that governs the bitcoin price with perpetual instability? By 2021, bitcoin prices had surged more than 150%, reaching a historic high of $68,991, before the crash. Even if the market calms down in 2022, the differences remain very strong: -17% in February, +8% in March and +10% in April. Bitcoin traded on April 27, 2022 at over $39,000; As of May 26, it has a value of US$29,494.60; As of June 21, it was $20,033.31.

The experience of El Salvador, where 92% of the more than 1,600 people surveyed expressed their hatred of bitcoin and 93.5% of their reluctance to pay in bitcoin, likely reinforces this mistrust.

Demonstrators hold a sign reading ‘Bitcoin: Deception’ during a demonstration against President Najib Bukele on December 12, 2021 in San Salvador.
Marvin Recinos/AFP

Bitcoin is regularly seen as a speculative bubble due to the unexpected alternation between sharp increases in its price and sudden drops. For many specialists, the popularization of its use can only lead to huge financial losses.

Central banks accuse it of encouraging financial imbalances, money laundering and tax evasion. The International Monetary Fund described El Salvador’s decision as a risk to “financial stability, financial soundness and consumer protection”. Regarding the Central African Republic, Abebe Emro Selassie, Africa Director of the International Monetary Fund, warned that cryptocurrencies should not be seen as “a panacea for economic challenges.”

Bitcoin is also suspected of facilitating fraud, terrorist financing and trafficking of all kinds due to its crypto-anonymous payment system. Illicit transactions enabled by Bitcoin are estimated at $76 billion annually, or 46% of Bitcoin transactions.

In any case, in order to institutionally adapt to the movement of crypto assets and succeed in the game, the Central African Republic must have the necessary infrastructure and economic complexity to accommodate its developments. However, the country’s economic and technological security raises many concerns.

Economic insecurity in the Central African Republic

According to the latest country risk assessment from the French insurance company specialized in export credit insurance (COFACE), the security and political conditions in the Central African Republic are a source of fragility and instability, which increases the extreme poverty of the population.

The economy is highly dependent on exports of goods – a dependence that is becoming increasingly problematic because the export of gold and diamonds, often occurring illegally, provides very little public revenue. With an average inflation of 2.7% over the past four years, the forecast of a growth rate of 3.4% for 2022 we should not forget that it was -0.6% in 2021. Other defeatist indicators, current account balance relative to GDP (- 6.1% in 2022) and the overall balance to GDP (-1.2% in 2022) have all been negative for the past three years.

According to the World Bank, since independence in 1960, per capita wealth has halved in the Central African Republic. Lasting economic recovery, which can only be achieved if insecurity sharply decreases, is essential to reducing poverty (70% of the population will live below the poverty line in 2020. This poverty explains the high infant mortality rate, estimated at 882 per 100,000 Birth but also in the country ranking on the United Nations Human Development Index, at 188e Ranked out of 189 countries in 2020.

The Central African Republic’s decision to adopt bitcoin as a legal currency is controversial (Jeune Afrique, May 5, 2022).

The African Development Bank made a similar observation, stressing that the risk of over-indebtedness in the Central African Republic remains high due to its high vulnerability to external shocks and exchange rate risks associated with the high level of its external debt. This economic scale illustrates just how deep and deep development challenges remain.

Infrastructure gap and weak digital education

The operation of a sustainable blockchain economy project at the national level, given its universality and the expected sequencing effects, should at least be based on a sustainable infrastructure and viable digital education.

However, the CAR’s infrastructure capabilities are very limited. In terms of energy, the ratio of energy between production (171 million kWh) and electricity consumption (159.40 million kWh) in the Central African Republic exceeds 108% of actual current needs. But on March 22, after asking the Central African Republic to fund the development of its electricity grid and capacity, the World Bank proposed that the Central African Republic remain the country in the world where the rate of access to electricity is the weakest. Before adding that implementing such a project would be very difficult there.

With an electrification rate of 3%, and while 4 of its 5 million residents lived without electricity in 2012, due to a lack of investment, a 2017 UNDP study showed that the country’s hydropower potential remains untapped. Bioenergy still accounts for 98% of national production. The superiority of this energy category in national production seems to justify the scarcity of technological infrastructures for electricity consumption. In addition, many major projects have been disrupted by cycles of security and political instability. In 2022, the government is still trying to reassure the population that they expect tangible achievements.

On a technological level, while approving the Central African Republic component of the fiber-optic backbone in Central Africa in 2018, the African Development Bank noted that “the Central African Republic remains the last landlocked country on the continent that does not have terrestrial fiber-optic links with its immediate neighbours. … In addition, to the notoriously low penetration rate of the Internet and mobile telephony is added the virtual lack of broadband wired infrastructures.”

Four years later, although Huawei and Orange act as major technology partners, progress is still poor. Si les Datacenter sont implémentés pour des structures spécifiques comme le ministère des Finances et du Budget ou celui qui accompagne la composante RCA de la dorsale à fibre optique d’Afrique centrale, ces installations critiques restent sousé la menace constante parne quiinsèe in the country.

Philip Wang, Executive Vice President of Huawei Northern Africa, asserted in November 2020 that “Where the Internet offers bridges, illiteracy always risks getting in the way.” The digital landscape of Central Africa demonstrates the validity of this assertion. Thus, the difficulty faced by individuals in mastering digital tools in the Central African Republic is one of the main limitations of digitization and education of the population with digital tools.

According to the 2019 Voluntary National Report to Monitor the Implementation of the Sustainable Development Goals, while the adult literacy rate is 58.9%, the share of schools with electricity is 3% and none of them are connected to the Internet. In total, there are 650 thousand Internet users in the Central African Republic for nearly 5 million people, with an overall penetration rate of 14% in January 2020. The Central African Republic ranks last in the global rankings of major social networks with a penetration rate of 2, 5% rate.

A reform that will only benefit a minority

In this context, the adoption of Bitcoin as an official currency will expose the digital divide in the country. The blockchain economy can be beneficial, but it requires significant human, material and financial investments. Otherwise, it will become an elite model whose impact will be limited to wealthy, digitally educated urban dwellers.

Finally, at the same time, it is too early to confirm the promises made at the launch of Bitcoin, but also, it is too early to definitively condemn them after the announcement of the new Sango project…

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